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NO.  95-82338- 4 


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Author: 

Zoller,  James  Frank 


Title: 


Taxation  of  business 
corporations 

PI3.C©' 

[Schenectady,  N.Y.] 


Date: 


[1916] 


MASTER  NEGATIVE  « 


COLUMBIA  UNIVERSITY  LIBRARIES 
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ZoUer,  James  Frank,  1878- 

Taxation  of  business  corporations ;  address  by  J.  F. 
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estate  association,  state  of  New  York,  at  Long  Beach,  ' 
L.  I  October  19-21,  1916.   fSdienectady,  N.  Y.,  Printed 
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TAXATION  OF  BUSINESS  CORPORATIONS 


Addnss  by  J.  F.  ZoUer,  of  Schenectady,  N.  Y.,  before  the  Thirteenth 
Annual  Convention,  Real  Estate  Association,  State  oj  New  York,  at 
Long  Beach,  L  I.,  October  19-21,  1916. 


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Taxation  of  Business  Corporations 


The  theme  of  this  paper  is  the  need  of  changes  in  the  present  tax 

law  for  the  purpose  of  properly  taxing  the  personal  property  of  busi- 
ness corporations  in  the  vState  of  New  York,  so  that  such  capital  may 
continue  to  come  here  and  remain  here,  and  at  the  same  time  bear  its 
just  proportion  of  the  taxation  burden  of  the  State.  In  order  to  fully 
realize  the  need  of  fundamental  changes  in  the  tax  law  relating  to 
taxation  of  personal  property  of  business  corporations  it  seems  neces- 
sary to  consider  briefly  some  of  the  provisions  of  the  present  tax  law, 
some  of  the  tax  bills  offered  at  the  last  session  of  the  legislature  and 
some  of  the  methods  adopted  in  an  attempt  to  properly  administer  the 
present  law. 

TAXATION  OF  PERSONAL  PROPERTY 

We  will  first  refer  briefly  to  the  provisions  of  the  tax  law  concern- 
ing the  taxation  of  personal  property. 

TAXATION  OF  PERSONAL  PROPERTY  OF  DOMESTIC 

CORPORATIONS 

Section  12  of. the  tax  law  provides  as  follows: 

"The  capital  stock  of  every  company  liable  to  taxation, 
except  such  part  of  it  as  shall  have  been  excepted  in  the  assess- 
ment roll  or  shall  be  exempt  by  law,  together  with  its  surplus 
profits  or  reserve  funds  exceeding  ten  per  centum  of  its  capital, 
after  deducting  the  assessed  value  of  its  real  estate,  and  all 
shares  of  stock  in  other  corporations  actually  owned  by  such 
company  which  are  taxable  upon  their  capital  stock  under  the 
laws  of  this  State,  shall  be  assessed  at  its  actual  value." 

While  the  section  refers  to  "capital  stock"  the  courts  have  held 
that  "it  denotes  the  property  owned  by  the  corporation,  and  not  the 
par  or  actual  value  of  the  shares  of  the  stockholders."  (People  ex  rel. 
Second  Ave.  R.R.  v.  Barker,  72  Hun,  126;  Oswego  Starch  Factory  v. 
Dolloway,  21  N.  Y.  449;  People  ex  rel.  Panama  R.R.  v.  Com'rs.  64 
How.  Pr.  405.) 


It  therefore  follows  that  the  provision  provides  for  the  taxation 
of  the  personal  property  of  domestic  corporations  and  includes  as 
personal  property,  the  difference,  if  any,  between  the  actual  value  and 
the  assessed  value  of  the  real  estate.  If,  however,  the  corporation  has 
a  surplus  it  may  deduct  such  a  proportion  of  such  surplus  as  does  not 
exceoi  io%  of  the  issued  capital. 

There  are  many  objections  to  this  section,  among  which  are  the 
following : 

(a)  The  difficulty  in  making  an  assessment  under  the  section 
due  to  the  complexity  of  the  method  adopted. 

Innumerable  decisions  have  been  rendered  under  this  section  and 
the  average  assessor  can  hardly  be  expected  to  be  familiar  with  such 
decisions  or  to  fully  apply  such  decisions  in  making  an  assessment 
of  personal  property  under  such  section. 

(b)  The  ease  by  which  the  section  may  be  evaded  by  corpora- 
tions desiring  for  any  reason  to  escape  taxation  upon  personal  property. 

Corporations  can  avoid  assessment  of  their  personal  property 
under  such  section  by  issuing  sufficient  bonds  to  offset  all  the  other 
property  considered  under  the  section  in  ascertaining  the  taxable  value. 
They  may  also  materially  reduce  the  amount  of  tax  payable  under  the 
section  by  locating  their  principal  offices  in  rural  localities  where  the 
tax  rate  is  low,  thereby  escaping  all  personal  property  taxation  in  the 
district  where  the  business  is  actually  transacted  and  where  the  personal 
property  is  actuaUy  located  and  protected  and  where  the  tax  ought 
to  be  paid. 

(c)  The  discrimmation  against  those  corporations  that  desire  to 
transact  business  without  debts,  and  to  pay  their  just  proportion  of  the 
tax  burden  in  the  tax  district  where  their  business  is  transacted. 

It  should  be  noted  that  this  section  contemplates  a  full  assessment 
upon  all  personal  prc^rty  both  tangible  and  intangible,  plus  the  differ- 
ence, if  any,  between  the  actual  and  assessed  value  of  the  real  estate, 
such  property  to  be  taxed  under  the  section  at  the  general  prc^erty 
rate.  As  there  is  no  analogous  rule  provided  in  the  tax  law  for  the 
assessment  of  such  property  owned  by  foreign  corporations,  individuals 
or  copartnerships,  as  we  shall  hereafter  see,  the  section  necessarily 
discriminates  against  domestic  corporations,  unless  they  see  fit  to 
resort  to  the  tax-dodging  method  of  locating  their  principal  office  in 
some  out-of-the-way  neck  of  the  woods,  or  go  in  debt  Therefore, 

a 


the  very  corporations  which  are  of  the  most  benefit  to  the  State  and 

which  should  be  encouraged  to  locate  in  the  State  are  discriminated 
against  under  the  section. 

TAXATION  OF  PERSONAL  PROPERTY  OF  FOREIGN 

CORPORATIONS 

Section  7  of  the  tax  law  provides  as  follows : 

"Non-residents  of  the  State  doing  business  in  the  State 
either  as  principals  or  partners,  shaU  be  taxed  on  the  capital 
invested  in  such  business,  as  personal  property,  at  the  Place 
where  such  business  is  carried  on,  to  the  same  extent  as  if  they 
were  residents  of  the  State." 
It  should  be  noted  that  there  is  no  specific  provision  for  the  taxa- 
tion of  the  personal  property  of  foreign  corporations,  but  the  f oregonig 
provision  applying  to  non-resident  individuals  generally  has  been  con- 
strued so  as  to  apply  to  the  property  of  foreign  corporations  mvested 
in  business  in  the  State.    (International  Banking  Co.  v.  Raym^d  117 
App.  Div.  62 ;  People  ex  rel.  Rurand  Ruel  Co.  v.  Wells,  180  N.  Y.  505; 
People  ex  rel.  Farcy  &  Oppenheim  Co.  v.  Wells,  183  N.  Y.  264.) 

TAXATION  OF  PERSONAL  PROPERTY  OF  INDIVIDUALS 
Section  6  of  the  tax  law  provides  as  follows: 

"AH  real  and  personal  property  subject  to  taxation  shall 
be  assessed  at  the  fuU  value  thereof,  provided,  l^owever,  that 
S^eTwner  of  persomil  property  shall  be  allowed  a  deduction 
from  the  full  value  of  all  his  taxable  personal  property  to  the 
extL  of  ^e  just  debts  owing  by  him  but  no  such  deduction 
shall  be  allowed  by  reason  of  the  indebtedness  of  the  owner  con- 
tlLcted  or  incurred  in  the  purchase  of  non-taxable  property  or 
securities  owned  by  him  or  held  for  his  benefit,  nor  for  or  on 
account  of  any  indirect  liabUity  as  suretv  guarantor  indorser 
or  otherwise,  nor  for  or  on  account  of  any  debt  or  liabihty  con- 
tracted or  incurred  for  the  purpose  of  evading  taxation. 

Section  8  of  the  tax  law  provides : 

"Every  person  shall  be  taxed  in  the  tax  district  where  he 
resides  *  *  *  for  all  personal  property  owned  by  hun  or 
under  his  control  as  agent,  trustee,  guardian,  executor  and 
administrator   *   *  * 


3 


TAXATION  OF  PERSONAL  PROPERTY  OF 

COPiillNERSHIPS 

There  is  no  provision  in  the  tax  law  for  the  taxation  of  copart- 
nerships as  such.  The  personal  property  of  copartnerships  can  be 
taxed  only  to  the  different  individuals  composing  the  copartnership. 

REPORTS  TO  LOCAL  ASSESSORS  IN  CONNECTION  WITH 
ASSESSMENT  OF  PERSONAL  PROPERTY 

Individuals,  copartnerships  and  foreign  corporations  are  not  re- 
quired to  make  any  report  whatever  to  local  assessors  in  connection 
with  assessments  of  personal  property  under  the  tax  law.  Domestic 
corporations,  on  the  other  hand,  are  required  to  make  the  report  to 
local  assessors  prescribed  by  Section  27  of  the  tax  law.  Such  section 
reads  as  follows : 

"The  president  or  other  ])roixM-  officer  of  every  moneyed  or 
stock  corporation  derivinj^  an  income  or  profit  from  its  capital 
or  otherwise  shall,  on  or  before  June  first,  deliver  to  one  of  the 
assessors  of  the  tax  district  in  which  the  company  is  liable  to 
be  taxed,  a  written  statement  in  the  form  prescribed  by  the  tax 
commission  specifying: 

"(i)  The  real  ])ro])ertv,  if  any,  owned  by  such  company, 
the  tax  district  in  which  the  same  is  situated  and,  unless  a  rail- 
road corporation,  the  sums  acttiallv  paid  therefor. 

"(2)  The  capital  stock  actually  paid  in  and  secured  to  be 
paid  in,  excepting  therefrom  the  sums  paid  for  real  property 
and  the  amoiint  of  such  capital  stock  held  by  the  State  and  by 
any  incorporated  literary  or  charitable  institution,  and 

"(3)  The  tax  district  in  which  the  principal  office  of  the 
company  is  situated,  or  in  case  it  has  no  principal  office,  the  tax 
district  in  which  its  operations  are  carried  on," 

If  such  statement  is  not  made  within  twenty  days  after  the  first 
day  of  June  or  is  insufficient,  evasive  or  defective,  the  assessors  may 
compel  the  corporation  to  make  a  proper  statement  by  mandamus. 

Section  28  of  the  tax  law  provides  a  penaUy  of  $250  for  wilful 

neglect  to  furnish  such  report.  ' 

This  is  the  only  form  of  report  required  by  law  in  connection 
with  the  assessment  of  personal  property  by  the  local  assessors. 

It  should  be  noted  that  this  report  requires  three  things  only  to 
be  stated,  viz. : 

(a)  The  amount  and  location  of  the  real  property  and  the  sums 
paid  therefor. 


4 


(b)  The  amount  of  paid-up  capital  stock. 

(c)  The  location  of  the  principal  office. 

At  the  last  session  of  the  legislature  an  amendment  was  offered 
to  the  tax  law,  giving  the  State  Tax  Commission  power  to  prescribe 
the  form  of  report  which  should  be  made  by  corporations  for  the 
purpose  of  an  assessment  under  Section  12  of  the  tax  law.  The 
result  of  this  report  undoubtedly  would  have  been  a  full  assessment 
of  corporations  under  Section  12  of  the  Tax  Law  and  a  full  discrim- 
ination against  those  corporations  before  referred  to  who  had  not 
created  debts  and  had  located  their  principal  office  in  the  district  where 
their  operations  were  carried  on.   This  bill  did  not  become  a  law. 

After  the  close  of  the  legislative  session  last  year  there  was  pre- 
pared and  forwarded  to  the  assessors  throughout  the  State  by  the  State 

Tax  Commission  a  certain  letter  of  instructions  dated  April  28,  1916. 
Such  letter  was  as  follows : 

April  28,  1916. 

"To  the  Board  of  Assessors: 

"You  are  about  to  begin  your  field  work  in  the  assessment 
of  property  in  your  tax  district.  In  line  with  the  duty  imposed 
upon  the  State  Tax  Commission  by  the  Tax  Law  of  the  State 
we  urge  you  to  obey  the  law,  particularly  in  the  requirement 
that  all  property  shall  be  assessed  at  full  value. 

"Do  your  full  duty  under  the  law ! 

"Don't  copy  the  old  roll  or  follow  tiie  old  methods ! 

"Do  make  a  real  assessment  roll  to  which  you  can  append 
your  conscientious  oaih ! 

"Don't  permit  your  district  to  be  the  one  in  which  the  law 
is  not  observed !  • 

"Organize  a  County  Assessor's  Association  and  agree  on 
above  plan  in  your  County ! 

"In  most  cases  under-valuations  result  in  discrimination  in 
favor  of  the  large  property  owners  and  against  the  smaller  ones. 
All  should  be  treated  exactly  alike.  You  should  not  be  concerned 
with  other  tax  districts,  for  the  State  Tax  Commission  is  making 
every  effort  to  bring  about  much  needed  reforms  in  all  of  the  tax 
districts  of  the  State.  There  will  be  no  direct  State  tax  this  year, 
so  that  the  question  of  putting  property  on  the  full  value  basis  is 
almost  entirely  a  local  one.  If  you  make  low  assessrnents  you 
will  have  a  high  rate  of  taxation,  and  one  result  of  this  will  be 
the  failure  to  assess  any  personal  property,  and  real  estate  will 
bear  the  entire  burden. 

"Your  particular  attention  is  also  called  to  the  assessment 
of  stock  of  corporations  liable  under  Section  12  of  the  Tax  Law. 
Every  such  corporation  which  has  its  principal  place  of  business 
in  your  tax  district  should  be  assessed  upon  its  capital  stock  bv 


5 


you.  To  make  an  effectual  assessment,  assess  every  such  corpo- 
ration at  an  amount  equal  to  its  capital  share  stock,  except  cor- 
porations which  you  have  been  assessing  at  a  valuation 
higher  than  the  par  value  of  their  capital  stock.  When  a  corpo- 
ration objects  to  your  assessment  have  it  file  a  sworn  statement 
upon  the  blank  which  this  department  will  furnish  you  for  such 
purpose.  Cities  may  use  their  own  blanks,  if  they  have  them, 
until  further  orders  from  the  Commission.  If  a  corporation 
doing  business  in  your  tax  district  claims  that  its  principal  place 
of  business  is  in  another  tax  district,  kindly  notify  the  assessors 
of  that  district  so  that  thev  mav  assess  that  corporation  there ; 
also  notify  the  State  Tax  Department  to  the  same  effect. 

"Please  call  this  communication  to  the  attention  of  your  col- 
leagues. Very  truly  yours, 

"MARTIN  SAXE,  President; 
"WALTER  H.  KNAPP, 
"RALPH  W.  THOMAS, 

"State  Tax  Commission.'' 

The  forepart  of  the  letter  referred  to  the  assessment  of  property 
in  general  regardless  of  the  character  of  the  owner,  and  the  assessor 
was  urged  to  assess  all  property  at  full  value.  No  rule,  however,  was 
suggested  to  enable  the  assessor  to  make  a  full  assessment  of  all  per- 
sonal property. 

Following  these  general  instructions  applicable  to  all  property 
"particular  attention"  was  called  to  the  assessment  of  corporations 
under  Section  12  of  the  tax  law,  and  a  rule  was  suggested  to  enable 
the  assessor  to  make  a  full  assessment  of  the  personal  property  of 

domestic  corporations.  The  rule  prescribed  for  the  assessment  of  the 
personal  property  of  corporations  under  Section  12  was  to  assess  every 
such,  corporation  at  an  amount  equal  to  its  capital  share  stock,  except 
corporations  which  had  been  assessed  at  a  valuation  higher  than  such 
par  value. 

The  letter  of  instructions  further  stated : 

"When  a  corporation  objects  to  your  assessment  have  it 
file  a  sworn  statement  upon  the  blank  which  this  department  will 
furnish  you  for  such  purpose." 

The  form  of  blank  referred  to  follows : 

"OFFICE  OF  THE  BOARD  OF  ASSESSORS. 

City  or  Town  of  County  or  

Application  for  Revision  of  Assessment  for  year  191  


6 


Assessed  pursuant  to  Section  12  of  the  Tax  Law. 

The  

(Please  state  full  name  of  the  corporation.) 
a  corporation  organized  under  the  laws  of  the  State  of  New 
York,  claiming  to  be  aggrieved  by  the  assessed  valuation  of  its 
personal  property  for  die  year,  makes  application  by  the  under- 
signed, one  of  die  officers  of  the  said  corporation,  to  have  the 
same  revised  and  corrected. 

STATE  THE  VALUE  OF  THE  FOLLOWING  ITEMS : 

ASSETS 

All  assets  must  be  scheduled,  whether  located  in  the  State 
of  New  York,  or  elsewhere,  including  deposits  in  banks  and 
debts  due  from  non-residents. 

1.  Real  Estate  $  

2.  Machinery,  plant,  office  furniture  and  fixtures  other 

than  real  estate  $  

3.  Goods,  wares  and  merchandise  $  

4.  All  other  tangible  personal  property  (this  does  not 

include  mortgages  or  credits)  $  

5.  Cash  on  hand  and  on  deposit  $  

6.  Debts  due  from  solvent  debtors  (this  includes  bonds 

and  all  credits,  also  ''secured  debts")  $  

7.  Shares  of  stock  of  other  corporations  $  

8.  Value  at  which  patent  rights,  copyrights,  trade- 

marks, good  will  and  franchises  were  taken  in 
payment  for  capital  stock  $  

9.  The  aggregate  of  the  above  assets  $  

DEDUCTIONS 

Except  the  items  numbered  12,  15,  17  and  18,  the  value  of 
every  item  to  be  deducted  must  be  the  sum  at  which  it  is  included 
in  the  above  statement  of  assets. 

(  U.  S.  Bonds,  N.  Y.  State  and 

Municipal  Bonds  $  

N.  Y.  Mortgages  recorded  on 
or  after  July  i,  1906,  and 
mortgages  on  which  a  regis- 
tration tax  has  been  paid 
since  May  13,  1907,  also  "se- 
cured debts."  (This  includes 
only  mortgages  and  "secured 
debts"  owned  by  the  corpo- 
ration)  $  

Goods   imported  by  above 
corporation    from  foreign 
countries  on  hand  in  unbrok- 
<  en  original  packages  


10. 


Property  exempt 
by  law,  which 
includes 


11.  Value  at  which  patent  rights,  copyrights,  trade- 

marks, good  will  and  franchises  were  taken  in 
payment  for  capital  stock  $- 

12.  So  much  of  the  surplus,  if  any,  as  shall  not  ex- 

ceed ten  per  centum  of  the  par  value  of  the  shares 
of  stock  issued  $- 

13.  Shares  of  stock  of  other  corporations  actually 

owned  by  the  above  corporation  which  arc  tax- 
able upon  their  capital  stock  

14.  Tangible  personal  property  having  a  permanent 

situs  outside  of  this  State,  specifying  its  nature 
and  location.  (This  does  not  include  bonds, 
notes,  evidences  of  debt  of  any  kind,  currency, 
deposits  in  banks,  bills  receivable,  or  any  other 
intangible  property)  •  


15.  The  assessed  value  of  the  corporation's  real  estate 

in  this  State,  including  its  special  franchises  $- 

16.  Real  estate  outside  of  this  State,  specifying  its 

location   ^ 

 $- 

17.  Indebtedness  secured  by  the  corporation's  bond  and 

mortgage  on  real  property  to  which  corporation 
now  holds  title  $- 

18.  All  other  indebtedness  of  the1 
corporation  not  contracted  or 
incurred  in  the  purchase  of  non- 
taxable property  or  securities, 
or  for  the  purpose  of  evading 
taxation.  (The  amount  owing 
for  goods  imported  by  above 
corporation  from  f ordgn  coun- 
tries on  hand  in  unbroken  orig- 
inal packages  and  the  capital 
stock  of  the  corporation  must 
not  be  mduded.) 
Itemized  as  foflows: 

19.  The  aggregate  of  the  items  set  down  in  answer  to 

questions  10  to  18,  inclusive  1 


Bonds  not  se- 
cured by  mort- 
gage of  real  es- 
tate  $- 

Notes   $- 

Open  Accounts-?. 


ADDITIONAL  INFORMATION  REQUIRED 

a.  Total  par  value  of  capital  stock  issued  $  

b.  Rate  of  last  dividend  Date — 


8 


c.  Amount  of  surplus,  if  any  as  shown  by  the 

books  $  

d.  Amount  of  indebtedness  for  above  imported 

goods ;  this  amount  is  not  included'  in  No. 

18,  but  is  in  addition  thereto  $  

Gross  assets  as  shown  by  answer  to  question  9  $  

Aggregate  of  deductions  from  gross  assets  as  shown  by 

answer  to  question  19  $  

Subtract  the  deductions  from  the  above  assets  $  

Add  "secured  debts"  upon  which  no  registration  tax 

has  been  paLd  -$  

The  result  is  the  Capital  Stock  liable  to  Taxation  $  

The  principal  office  or  the  place  of  transacting  the  financial 
business  of  the  said  corporation  is  situated  in  the  City  or  Village 

of  Town  of  County 

of  

STATE  OF  NEW  YORK. 
County  of  

I,  the  

of  the  said  corporation,  being  duly  sworn,  do  hereby  certify 

that  the  foregoing  is  in  all  respects  a  just  and  true  statement  of 

the  property  and  debts  of  the  corporation  on  the  first  day  of 

July,  191   The  statement  is  in  accord  with  the  books  of 

account  of  the  corporation  except  as  otherw^ise  noted. 

Sworn  to  before  me  this  day  of  191  

»» 

Notary  Public. 

It  would  therefore  seem  that  the  purport  of  these  instructions 

was  for  the  assessor  to  make  an  arbitrary  and  excessive  assessment 
against  every  corporation  subject  to  assessment  under  Section  12,  and 
then  place  upon  the  corporation  the  burden  of  getting  such  arbitrary 
assessment  reduced. 

This  illustrates  the  difficulty  of  administering  the  present  tax  law, 
and  also  the  unfairness  and  discrimination  that  necessarily  results  in 
case  it  is  possible  to  in  any  way  administer  the  present  law  relating  to 
the  taxaticm  of  personal  property  of  domestic  corporations. 

The  chief  objection  to  this  method  of  assessing  the  personal  prop- 
erty of  domestic  corporations  in  an  attempt  to  administer  the  present 
tax  law  would  seem  to  be  that  it  substitutes  an  arbitrary  assessment 


9 


for  a  judicial  assessment  as  contemplated  by  the  tax  law.  This  law 
contemplates  that  the  local  assessors  throughout  the  State  shall  exer- 
cise quasi-judicial  functions  in  making  assessments.  This  fact  is  fully 

recognized  by  the  present  State  Tax  Commission.  In  its  Manual  of 
Instructions  to  Assessors  issued  in  May,  1916,  we  find  the  following 
on  page  13: 

"When  completed  the  assessment  roll  should  be  the  result 
of  the  deliberate,  careful  and  conscientious  judgment  of  at  least 
two  of  the  three  assessors  in  each  district." 

It  is,  of  course^  impossible  to  get  deliberate,  careful  and  conscien- 
tious judgment,  or  any  judgment  at  all,  if  under  our  tax  law  we  find  it 

necessary  to  resort  to  arbitrary  assessments.  This  condition  would 
seem  to  be  a  potent  reason  for  the  elimination  of  Section  12. 

FRANCHISE  TAXATION 

Under  Section  182  of  the  tax  law  certain  business  corporations 
are  required  to  pay  a  franchise  tax  in  addition  to  the  tax  prescribed 
by  Section  12  of  the  tax  law.  Section  182  is  exceedingly  complicated, 
but  the  rate  of  tax  thereunder  in  general  depends  upon  the  rate  of 
dividend  declared  being  one-fourth  of  a  mill  upon  each  per  centum 
of  dividends  declared.  The  base  of  the  tax,  generally  speaking,  is 
such  a  proportion  of  the  value  of  the  issued  capital  stock  as  the  prop- 
erty of  the  corporation  in  the  State  bears  to  the  total  property  wherever 
located.  This  section  has  been  very  generally  condemned  by  practically 
all  individuals  qualified  to  speak  upon  the  subject,  not  only  because 
of  the  complexity  of  the  section  and  the  confusion  necessarily  resulting 
in  the  administration  of  it,  but  also  because  of  its  unsoundness  from 
a  scientific  and  economic  standpoint. 

Mr.  John  J.  Merrill,  at  present  a  Deputy  State  Tax  Commissioner, 
has  undoubtedly  had  more  experience  in  the  administraticm  of  Section 
182  of  the  tax  law  than  any  other  individual.  Mr.  Merrill  in  speaking 
before  the  First  State  Conference  on  Taxation  of  the  State  of  New 
York,  held  in  Utica,  N.  Y.,  in  January,  191 1,  in  referring  to  said 
section,  said: 

"The  taxation  by  the  State  of  franchises  of  corporations, 
based  upon  their  capital  stock,  as  the  law  now  stands  smd  as 
construed  by  the  courts,  constitutes  a  sadly  mixed  and  inade- 
quate system.    This  is  due  to  three  concurring  c(mdttions, 

10 


namely,  (i)  That  the  courts  in  construing  this  law  in  its  earlier 
conditions  held  that  as  to  domestic  corporations  the  tax  was 
based*  upon  their  franchises,  but  as  to  foreign  corporations  it 
was  a  tax  upon  a  business  done  and  was  measured  by  the 
actual  amount  of  'capital'  employed,  as  distinguished  from  *cap- 
ital  stock.'  In  the  attempt  to  distinguish  between  and  define 
'capital'  and'  capital  stock'  some  'fearful  and  wonderful'  results 
were  attained,  and  in  later  years  the  effort  to  follow  these 
earlier  decisions  has  tended  to  lead  us  farther  and  farther  mto 
the  intricate  mazes  of  doubt  and  disaster.'* 

Professor  Edwin  R.  A.  Seligman  at  the  same  Conference  in  dis- 
cussing the  same  law  said : 

"But  even  in  those  cases  where  a  precise  rule  is  laid  down, 
the  rule  is  not  by  any  means  free  from  objection.  Take,^  as  an 
example,  our  so-called  annual  franchise  tax  on  domestic  and 
foreign  corporations.  Who  does  not  know  how  we  came,  almost 
a  generation  ago,  to  copy  a  method  that  had  been  introduced 
shortly  before  in  Pennsylvania?  But  I  wondter  how  many  know 
that  when  Pennsylvania  came  to  look  over  the  whole  problem 
of  taxation  in  a  broad  and  comprehensive  way,  she  chai^fed  m 
most  essential  respects  the  plan  which  we  have  adopted,  and 
which  was  found  not  to  secure  the  justice  and  equality  whicn 
they  desired.  Our  annual  franchise  tax,  with  its  complicated 
scheme  of  calculation,  and  with  its  utter  disregard  of  bonded 
indebtedness,  forms  a  method  which  has  been  practically  aban- 
doned by  our  sister  States.  This  is  not  the  place  to  attempt  the 
elaboration  of  the  proper  principle  lliat  should  obtain  in  any 
comprehensive  and  uniform  system  of  corporate  taxation ;  but 
this  is  the  place  to  protest  against  the  permanent  continuation  of 
antiquated  methods,  and  it  is  the  place  to  voice  the  demand  for 
a  movement  which  shall  result,  not  only  in  the  adoption  of  def- 
initeness  and  precision  in  lieu  of  arbitrariness,  but  for  at  all 
events  some  correspondence  between  administrative  rules  and 
sound  economic  prindples." 

Professor  Seligman  also  referred  to  the  same  law  in  his  work  en- 
titled "Essays  on  Taxation,"  and  in  that  woric  he  had  this  to  say  con- 
cerning Section  182: 

"The  tax  is  assessed  according  to  the  capital  stock.  Orig- 
inally the  rate  was  just  one-half  of  that  of  the  original  Penn- 
sylvania protot)rpe.  At  present,  however,  the  rate  of  tax  is 
determined  according  to  very  complicated  rules.  In  reality  there 
are  in  New  York  no  less  than  six  different  classes,  although 
the  rather  confused  law  docs  not  clearly  differentiate  them.*' 


II 


Mr.  Harrison  WUlianis,  Tax  Agent  of  the  Erie  Railroad,  in 
speaking  upon  the  same  subject  before  the  First  State  Conference  on 
Taxation  of  the  State  of  New  York  above  referred  to,  made  the  fol- 
lowing statement  concerning  such  section: 

"The  assessment  of  capital  stock  is  in  such  chaotic  condi- 
tion that  it  is,  I  think,  a  fair  statement  that  no  one  could  pos- 
sibly explain  the  administration  of  the  law  as  to-day  actually  in 
force,  by  a  mere  study  of  the  face  thereof.  It  has  been  con- 
strued in  a  manner  which  from  a  mere  perusal  of  the  statute 
seems  little  less  than  fanciful.  The  decisions  are  by  no  means 
uniform  and  the  status  of  a  o^iven  corporation  thereunder  to-d^ay 
is  one  of  the  most  technical  and  difficult  questions  an  attorney 
specializing  in  taxation  is  called  upon  to  answer.  The  latest 
result  of  the  constantly  added  amendments  has  been  the  recent 
decisions  of  the  Court  of  Appeals  in  the  case  of  non-dividend 
paying  corporations,  reducino^  the  Slate's  revenue  from  those 
sources  by  many  hundred's  of  thousands  of  dollars  annually, 
although  it  is  thought  by  those  who  were  instrumental  in  draw- 
ing the  portion  of  the  law  construed  that  such  construction  is 
wholly  at  variance  with  the  intention  of  the  Legislature  which 
passed  the  amendment." 

The  Courts  have  also  severely  criticised  the  method  of  taxing 
corporations  under  the  present  Section  182  of  the  tax  law. 

Judge  Cullen  in  the  case  of  People  ex  rel.,  etc.,  Co.  v.  Roberts, 
168  N.  Y.  14,  in  construing  said  section  said  in  the  opinion: 

"We  are  quite  aware  that  despite  our  construction  of  the 
statute  there  will  still  remain  in  it  some  inconsistencies  and  ap- 
parent unfairness  in  particular  cases.  The  remedy  in  those 
cases  must  be  an  appeal  to  the  legislature  for  modification  of 
the  law." 

Judge  Haight  in  the  case  of  People  ex  rel.  New  York  Central  v. 

Knight,  173  N.  Y.  255,  in  writing  an  opinion  under  such  section  and 
concluding  that  Section  182  must  be  read  with  the  present  Section  193 
of  the  tax  law,  said: 

"The  two  sections  are  apparently  conflicting.  In  such  cases 
it  is  the  duty  of  courts  to  reconcile  contradictory  or  conflicting 
provisions  when  possible,  and  the  case  cited  is  a  precise  authority 
for  the  principle  that  the  tax  should  be  based  upon  the  actual 
value.  This  permits  the  statute  to  operate  in  a  way  tiiat  is 
reasonable  and!  just,  while  the  other  view  would  render  it  even 
more  confusing  than  it  now  is.  Courts  cannot  always  follow 
logical  reasons  when  dealing  with  a  complicated  statue  con- 
structed without  much  method  or  system  in  the  arrangement  of 


12 


its  different  parts  and  lacking  in  clearness  and  precision  of 
language." 

Judge  Werner  in  the  case  of  People,  etc.,  v.  Williams,  198  N.  Y. 
238,  in  construing  Section  182  said  in  the  opinion: 

"But  even  if  we  concede  that  this  difference  in  the  phrasing 
of  the  two  subdivisions  of  the  same  section  is  indicative  of  an 
intent  to  tax  non-dividend  paying  corporations  with  impaired 
capital  upon  the  basis  of  the  par  value  of  their  capital  stock, 
we  cannot  escape  the  conviction  that  a  very  simple  idea  which 
might  have  been  framed  in  very  plain  language  has  been  ob- 
scured in  a  mass  of  verbiage  much  better  calculated  to  conceal 
than  to  reveal  the  true  intent" 

The  same  Judge  in  a  later  case  entitled  People  ex  rel.,  etc.,  v. 
Gaus,  198  N.  Y.  250,  made  the  following  statement  concerning  such 
section : 

"The  addition  of  a  few  words  would  have  made  the  mean- 
ing of  this  part  of  the  statute  so  clear  as  to  preclude  mistake  or 
misunderstanding.   As  it  stands,  it  is  doubtful  and  equivocal. 

It  was  the  necessary  confusion  that  resulted  in  construing  the 
system  of  taxation  under  the  present  Section  182  of  the  tax  law  that 

evidently  caused  Judge  Learned  in  an  early  case  (People  v.  Delaware 
&  Hudson  Canal  Company,  54  Hun.  598)  to  lose  all  faith  in  legislators, 
for  in  construing  the  law  at  that  time  Judge  Learned  said : 

"Any  one  who  knows  how  statutes  are  passed  mnst  be 
aware  that  the  intent  of  the  legislature  would  be  extronely 
difficult  to  ascertain ;  if  indeed,  in  the^  minds  of  many  of  the 
legislators  any  such  thing  existed  at  all." 

The  method  of  taxing  corporations  under  the  present  Section  182 
of  the  tax  law  was  originally  contained  in  Chapter  542  of  the  laws  of 
1880.  The  law  has  been  repeatedly  amended  since  that  time,  more 
especially  by  the  laws  of  1882,  1889,  1890,  1896,  1901,  1906,  1907,  191O, 
and  a  most  drastic  amendment  was  offered  at  the  last  session  of  the 
legislature,  which  was  not  adopted. 

If  any  reliance  can  be  placed  upon  the  opinions  expressed  by 
experts  and  by  judges  in  reference  to  the  scheme  of  taxation  provided 
for  under  Section  182,  and  if  numerous  amendments  are  any  criterion 
whatever,  it  would  seem  that  it  would  be  difficult  to  imagine  a  more 
complicated,  confusing  and'  unscientific  method  of  taxation  than  that 
provided  for  under  Section  182  of  our  present  tax  law. 


13 


It  cannot  be  said  that  even  now  the  law  is  settled  as  to  the  intent 
and  meaning  of  Section  182,  notwithstanding^  the  numerous  amend- 
ments to  that  section  and  the  multitudinous  number  of  decisions  there- 
under by  the  courts  of  the  State.  As  late  as  September,  1916,  the 
Appellate  Division  of  the  Third  Department  handed  down  a  decision 
in  the  case  of  People  ex  rel.  Rid^ewood  Land  and  Improvement  Com- 
pany V.  State  Tax  Commission,  holding  that :  "Where  a  stock  corpo- 
ration, organized  under  the  Act  of  1848  and  amendments  thereto,  for 
the  purpose  of  'purchasing,  taking,  holding  and  possessing  real  estate 
and  buildings,  and  selling,  leasing  and  improving  the  same/  has  dis- 
posed of  all  its  real  estate  and  buildings,  receiving  payment  therefor 
partly  in  cash  and  partly  in  purchase-money  mortgages,  has  distributed 
among  its  stockholders  the  cash  so  received  and  is  engaged  in  collect- 
ing and  so  distributing  the  sums  due  on  said  mortgages,  it  is  not  subject 
to  tax  under  Section  182  of  the  Tax  Law  for  the  privilege  of  doing 
business  or  exercising  its  corporate  franchises  in  this  State. 

"Sums  so  distributed  to  the  stockholders,  even  though  they  consist 
in  part  of  interest  on  purchase-money  mortgages  or  balances  thereof, 
do  not  constitute  'dividends'  within  the  meaning  of  Section  182  of  the 
Tax  Law. 

"The  capital  of  the  corporation  is  not  'employed  within  this  State,' 
nor  is  it  'doing  business  or  exercising  its  corporate  frairchises'  therein, 
by  the  mere  holding  of  a  purchase-money  mortgage  and  the  dis- 
tribution among  stockholders  of  the  principal  and  interest  thereof  as 
collected." 

We  quote  from  the  opinion  in  that  case  as  follows : 

"Upon  the  broader  question  of  whether  the  caintal  of  the 
relator  was  employed  in  this  State,  we  are  not  persoaded  that 
the  mere  holding  of  a  purchase-money  mortgage  and  the  dis- 
tribution of  the  principal  and  interest  as  it  is  collected,  consti- 
tutes domg  the  business  for  which  the  relator  was  incorporated. 
It  has  authority  under  its  franchise  to  be  a  corporation  to  'ac- 
quire by  grant,  gift,  purchase,  devise  or  bequest;  to  hold  and 
dispose  of  such  property  as  the  purposes  of  the  corporation 
shall  require,  subject  to  such  limitations  as  may  be  prescribed 
by  law'  (General  Corporation  Law,  sec.  ii),  and  this  power 
would  seem  to  be  sufficient  to  warrant  the  corporation  in  holding 
a  purchase-money  mortgage  during  the  time  that  it  was  neces- 
sary to  collect  the  principal  and  interest,  without  being  held  to 
be  exercising  its  franchise  to  do  the  things  which  were  specially 
permitted  to  it  under  its  charter.  At  least  we  are  unable  to  see 
any  clear  distinction  between  the  case  at  bar  and  that  of  Lehigh 

14 


&  N.  Y.  R.R.  V.  Sohmer  (217  N.  Y.  443),  so  far  as  this  partic- 
ular point  is  concerned,  and  we  are  disposed  to  leave  the  distinc- 
tionfi,  if  one  is  to  be  made,  to  the  Court  of  Appeals.'' 

It  therefore  seems  that  although  this  law  was  first  enacted  in  1880, 
and  has  been  amended  many  times  since,  to  meet  the  many  difficulties 
arising  thereunder,  wc  now  find  our  Appellate  Division  calling  upon 
the  highest  court  in  the  State  to  pass  upon  a  certain  phase  of  this 
Act,  for  the  reason  that  the  Appellate  Division  does  not  feel  fully 
competent  to  make  the  decision. 

Under  Section  183  of  the  tax  law  manufacturing  corporations  and 
certain  other  corporations  therein  mentioned  are  exempt  from  the 
payment  of  the  franchise  tax  provided  for  under  Section  182,  pro- 
vided the  corporations  named  in  Section  183  invest  at  least  40%  of 
their  capital  in  their  regular  business  in  the  State  of  New  York.  It 
would  appear  that  manufacturing  corporations,  which  undoubtedly 
constitute  the  most  important  class  under  Section  183,  were  promised 
exemption  from  this  franchise  taxation,  if  they  would  invest  40%  of 
their  capital  in  manufacturing  in  the  State. 

At  the  last  session  of  the  legislature  a  bill  was  introduced  having 
for  its  object  the  repeal  of  Section  183,  so  as  to  subject  manufacturing 
corporations  to  taxation  under  the  confusing  system  covered  by  Sec- 
tion 182.  Manufacturing  corporations  very  generally,  objected  to  this 
measure  upon  the  ground  that  it  would  amount  to  a  repudiation  of  a 
contract  between  them  and  the  State  of  New  York,  which  contract 
guaranteed  to  such  corporations  an  exemption  under  Section  182  if 
they  made  a  permanent  investment  of  40%  of  their  capital  in  the 
State,  and  inasmuch  as  certain  manufacturing  corporations  had  relied 
in  good  faith  upon  such  exemption  and  had  fully  performed  their 
part  of  the  contract  by  makii^  a  permanent  investment  of  40%  of 
their  capital  in  the  State,  to  now  remove  such  exemption,  they  con- 
tended, would  constitute  an  act  of  bad  faith  upon  the  part  of  the 
State.  Whether  or  not  this  argument  were  sound  it  would  seem  to 
be  a  fact  that  any  corporation  would  be  justified  in  opposing  any  act 
that  would  bring  it  under  so  confusing,  complex  and  unscientific  a 
method  of  taxation  as  that  contained  in  Section  182. 

We  have  endeavored  in  the  foregoing  to  briefly  sununarize  the  tax 
situation  in  the  State  of  New  York  concerning  business  corporations 
under  the  law  and  its  administration  by  the  tax  officials.  Let  us  now 
take  some  concrete  examples  and  ascertain  if  we  can  the  probable 
results  in  case  the  present  tax  law  could  be  reasonably  enforced  and 


was  enforced  by  the  tax  officials.  As  the  discrimination  under  the 
enforcement  of  the  present  tax  law  would  appear  to  be  more  glaring 
against  domestic  manufacturing  corporations  than  other  business  cor- 
porations, we  will  consider  a  domestic  manufacturing  corporation  in 

the  following  illustration: 

Let  us  consider  a  tax  district  containing  only  the  following  tax- 
payers, to  wit: 

(1)  A  domestic  manufacturing  corporation. 

(2)  A  foreign  manufacturing  corporation. 

(3)  A  copartnership  engaged  in  manufacturing,  and 

(4)  An  individual  engaged  in  manufacturing. 

Let  us  assume  that  each  taxpayer  has  the  same  amount  and  kind 

of  property,  is  engaged  in  the  same  kind  of  business,  and  that  there 

are  no  other  taxpayers  in  the  district. 

The  reasonable  value  of  all  of  the  property  of  each  of  the  above 
mentioned  taxpayers,  let  us  say,  is  as  follows: 


Description  Value 

Real  estate  and  fixed  machinery  $160,000 

Machinery  and  tools  not  part  of  realty   20,000 

Goods,  wares  and  merchandise   160,000 

Notes  and  accounts  receivable   60,000 

Corporate  securities  (bonds)  ^   100,000 

Cash   100,000 


Total  property  $600,000 

Stock  issued  by  corporation,  say  ?  $600,000 


Now,  as  each  taxpayer  is  located  in  the  same  district,  has  the 
same  amount  and  kind  of  property,  and  uses  it  for  the  same  purpose, 
it  is  obvious  that  each  ought  to  have  identically  the  same  assessment 
and  bear  identically  the  same  tax  burden,  but  watch  what  happens: 

A.  We  will  first  take  the  domestic  manufacturing  corporation 
having  the  above  described  property  taxable  under  Section  12  of  the 
tax  law.  This  corporation,  say,  has  made  report  either  prior  to  its 
assessment  or  subsequent  to  it  as  a  result  of  excessive  assessment. 
The  result  is  as  follows: 


Total  property  shown  by  report  ^  $600,000 

Less  assessed  value  of  real  estate,  say   96,000 

Total  personal  property  assessment  $504,000 

Real  estate  assessment  .   96^000 

Total  assessment  $6oo/xx) 

16 


Note  :  In  this  example  we  have  assumed  that  the  real  estate  is 
assessed  at  60%  of  value.  This,  we  believe,  is  about  the  average 
rate.  In  any  event,  we  are  using  the  same  rate  of  actual  value  in  all 

examples  shown  herein,  so  the  rate  is  not  so  important.  Of  course, 
the  fact  that  the  real  estate  is  assessed  at  less  than  actual  value,  is  of 
no  beneht  to  the  domestic  corporation  because  the  difference  between 
the  actual  value  and  assessed  value,  if  any,  is  added  to  the  personal 
assessment  under  Section  12  of  the  tax  law. 

B.  Next  take  the  foreign  manufacturing  corporation,  taxable 
under  Section  7  of  the  tax  law,  no  report  being  required  of  a  foreign 
corporation. 


Real  estate  and  machinery,  assessed  same  as 

domestic  manufacturing  corporation   $96,000 

Machinery  and  tools,  without  report  probably 

not  more  than  50%   $10,000 

Goods,  wares  and  merchandise,  without  report 

probably  not  more  than  50%   80,000 

Notes  and!  accounts  receivable,  without  report 

probably  not  assessed    

Corporate  securities  (bonds)  not  assessed —   

Cash,  without  report  probably  not  assessed-.   

Total  personal  property  assessment   $90,000 

Total  real  estate  assessment   96,000 

Total  assessment  $186,000 

Note:  As  the  foreign  corporation  makes  no  report,  it  is  prob- 
able that  it  could  successfully  contend  that  its  notes,  accounts,  cash  and 
other  intangibles  were  located  outside  the  State  where  its  principal 
office  was  located. 

C.  Next  take  the  co-partnership  engaged  in  manufacturing,  tax- 
able under  the  general  provisions  of  the  tax  law,  no  report  being 
required. 

Real  estate,  assessed  same  as  domestic  manu- 
facturing corporation   $96,000 

Machinery  and  tools,  probably  not  more  than 

50%    $10,000 

Goods,  wares  and  merchandise,  probably  not 

more  than  50%   80,000 

Notes,  accounts,  etc.,  probably    


17 


Corporate  securities,  probably 
Cash,  probably  


Total  personal  property  assessment  $90,000 

Total  real  estate  assessment   96,000 

Total  assessment  :  $186,000 

D.  The  assessment  of  the  same  property  in  the  hands  of  an 
individual  engaged  in  manufacturing  would  probably  be  the  same  as 
the  assessment  against  the  co-partnership,  viz. : 

Total  personal  property  assessment  .   $90,000 

Total  real  estate  assessment   96,000 

Total  assessment  $186,000 


We  realize  that  these  assessments  would  vary  in  different  locali- 
ties, but  we  believe  that  the  result  of  the  investigation  by  the  Joint 
Legislative  Committee  on  Taxation  of  the  State  of  New  York,  of 
which  our  friend  Senator  Mills  was  Chairman,  established  that  in- 
tangible personal  property  such  as  bonds,  cash  in  bank,  notes  and  ac- 
counts receivable,  and  any  property  which  the  assessor  could  not  see, 
escaped  taxation  generally  in  this  State  in  the  hands  of  individuals  and 
co-partnerships.  The  passage  of  the  secured  debts  law  tends  to  sub- 
stantiate this  view.  In  r^rd  to  tangible  personal  property  such  as 
live  stock,  machinery  and  merchandise,  we  think,  as  a  rule  50%  of 
the  actual  value  would  fairly  represent  the  actual  assessment  upon 
the  part  of  the  local  assessor.  This  was  the  experience  in  Massachu- 
setts where  the  individual  was  required  to  file  a  report  with  the  local 
assessor,  in  default  of  which  he  was  doomed  to  the  assessment  made 
by  the  assessor.  Therefore,  if  Massachusetts,  where  a  report  is  re- 
quired from  individuals,  does  not  assess  tangible  property  at  more  than 
50%  of  actual  value  on  the  average,  it  would  seem  that  New  York, 
where  no  report  is  required,  would  not  assess  such  property  at  a 
greater  percentage  of  actual  value. 

It  therefore  seems  that  the  assessment  of  the  four  taxpayers  above 
mentioned,  all  having  the  same  property,  would  be  represented  as 
follows : 

Total  Assessment 

A.  The  Domestic  Corporation   $600,000 

B.  The  Foreign  Corporation   186,000 

18 


C.  The  Co-partnership  — .   186,000 

D.  The  Individual   186,000 


Total  assessment  in  district  $1,158,000 

Let  us  assume  that  the  rate  of  tax  was  3%.  Then  the  taxes  paid 
would  be  as  follows : 

A.  The  Domestic  Corporation   $l8,O00 

B.  The  Foreign  Corporation  (less  than 

as  much)   5»58o 

C.  The  Co-partnership  (less  than  as 

much)    5,580 

D.  The  Individual  (less  than  Y^  as  much)  5,580 


Total  tax  raised  -   $34,740 


In  other  words,  while  the  domestic  corporation  owns  but  25%  of 
the  property  in  the  district,  it  pays  over  51%  of  the  amount  of  tax.  In 
other  words,  the  tax  against  the  domestic  manufacturing  corporation 
is  more  than  three  times  that  of  any  other  taxpayer  in  the  district 
having  the  same  amount  of  taxable  property.  This,  we  think,  is  the 
necessary  result  of  an  assessment  under  Section  12  of  the  tax  law  in 
case  such  section  is  rigidly  enforced. 

You  will  recall  that  the  present  State  Tax  Commission  in  the 
forepart  of  the  letter  of  instructions  referred  to  herein,  advocated  the 
treating  of  all  property  alike  in  the  matter  of  assessment,  yet,  upon  a 
careful  analysis  of  the  situation  it  seems  that  the  result  is  necessarily 
a  discrimination  against  corporations  that  are  assessed  under  Section 
12  of  the  tax  law,  unless  they  have  debts  to  offset  the  assessment. 

Of  course,  if  the  taxpayers  considere<lHHMM|debts  (the  above 
property  being  considered  exclusive  of  all  inHHness)  the  situation 
would  have  been  different.  But,  then,  indebtedness  is  a  matter  of  ex- 
emption from  taxation,  and  we  are  concerned  here  with  taxation 
rather  than  exemption  from  taxation.  We  must  also  point  out  that 
if  the  domestic  corporation  had  been  fortunate  enough  to  have  had 
a  surplus— that  is,  if  its  total  assets  had  exceeded  its  liabilities,  includ- 
ing its  issued  and  outstanding  capital  stock — ^such  surplus  would  have 
been  exempt  up  to  an  amount  tK>t  exceeding  10%  of  ^e  issued  capital 
stock. 

If  the  bill  advocated  at  the  last  session  subjecting  manufacturing 
corporations  to  a  franchise  tax  in  addition  to  their  other  taxes,  had 


19 


been  passed,  the  discrimination  against  manufacturing  corporations 
as  compared  with  individuals,  would  have  been  even  greater  than 
it  now  is. 

Let  us  see  what  additional  franchise  taxes  the  domestic  corpo- 
raticm  would  have  had  to  pay  if  this  franchise  tax  bill  had  been  passed. 

The  capital  stock  of  this  corporation  was  $600,000 

Its  net  earnings  were,  let  us  say   $7S»00^ 

It  could  declare  a  dividend  of  10%,  amounting  to   60,000 

And  carry  to  surplus   $15,000 

The  rate  of  tax  would  be  J4  mills  for  every  1%  of  dividend,  or 
10  times  }i  mills,  which  is  $.0025  the  tax  rate.  $600,000  times  $.0025 
is  $1,500,  the  franchise  tax. 

The  total  property  tax  was   $18,000 

The  frandiise  tax  would  be   1,500 

Total  tax  of  domestic  company   $l9»5O0 

Of  course  the  individual  pays  no  franchise  tax,  his  tax 

would  still  be   5»58o 

This  would  make  the  total  tax  of  the  domestic  corpo- 
ration  $i3»92o 

greater  than  that  of  the  individual  having  the  same  amount  of  taxable 
property  and  transacting  the  same  business  in  competition  with  the 
corporation.  To  put  the  proposition  another  way,  the  corporation 
would  have  to  earn  $13,920,  or  over  2.3%  more  on  its  investment  than 
the  individual  would  have  to  earn  on  tiie  same  investment,  to  enable 
the  corporation  to  compete  with  the  individual  in  the  sale  of  its 
products,  all  due  to  this  discrimination  in  taxation. 

Of  course,  the  co-partnership  would  be  in  just  as  favorable  a 
position  as  the  individual,  because  the  co-partnership  would  be  taxed 
precisely  the  same  as  the  individual. 

The  foreign  corporation  would  be  favored  in  connection  with  its 
taxation  upon  property,  as  we  have  seen,  but  would  be  subject  to  the 
franchise  tax  in  proportion  to  the  amount  of  property  invested  in  the 
State. 

Another  difficulty  is  that  other  States  have  much  more  favorable 
tax  laws  for  corporations  than  the  laws  of  this  State.  For  example, 
let  us  consider  a  foreign  corporation  with  the  same  kind  and  amount  of 


20 


property  as  the  domestic  manufacturing  corporation  herein  mentioned, 
the  foreign  company  being  organized  in  Pennsylvania  and  having  its 
property  located  in  that  State. 

In  Pennsylvania  manufacturing  corporations  pay  no  personal  prop- 
erty taxes  nor  franchise  taxes  whatever.  The  real  estate  is  not  tax- 
able at  all  in  that  State  for  State  purposes.  Therefore,  the  only  taxes 
payable  by  a  Pennsylvania  manufacturing  corporation  are  local  taxes 
assessed  upon  the  real  estate. 

Let  us  therefore  consider  the  taxes  that  would  probably  be  paid 
by  a  Pennsylvania  manufacturing  corporation  having  the  same  prop- 
erty in  Pennsylvania  as  the  New  York  manufacturing  corporation 
herein  considered. 

Description  of  Prop.     Reasonable  Value.  Amt.  of  Tax 

Machinery  and'  tools  $20,000 

Goods,  wares  and  merchandise.  160,000   

Notes  and  accounts  receivable  60,000   

Corporate  securities  (bonds)  100,000   

Cash  100,000   

Real  estate  160,000  (probably)  $2,560 

In  figuring  the  amount  of  local  taxes  payable  upon  the  real  estate, 
we  have  assumed  that  the  real  estate  would  be  assessed  at  80%  of  its 
value  and  that  the  tax  rate  wouki  be  2%.  The  rate  of  assessment 
and  the  rate  of  tax  would  undoubtedly  vary  in  different  localities,  but 
we  believe,  based  upon  our  experience,  that  the  foregoing  rates  would 
fairly  represent  the  average  in  Pennsylvania. 

The  Pennsylvania  corporation  would  therefore  pay  an  annual  tax 
of  about  $2,500,  whereas  the  New  York  corporation,  with 
identically  the  same  kind  and  amount  of  property,  if  assessed  under 
Section  12  of  the  tax  law  and  subjected  to  the  franchise  tax  under 
Section  182,  would  pay  an  annual  tax  of  about  $19,500.  In  other 
words,  the  tax  paid  by  the  Pennsylvania  corporation  ($2,500.00)  in 
Pennsylvania,  would  represent  only  about  .4  of  1%  of  its  total  invest- 
ment  of  $600,000,  whereas  the  tax  paid  by  the  New  York  corporation 
($19,500.00)  in  New  York  would  represent  about  z%%  of  its  total 
investment  of  $600,000.  If  we  assume  that  the  net  earnings  of  these 
companies  amount  to  $75,000  in  each  case,  and  they  probably  would  not 
exceed  that  figure,  then  the  Pennsylvania  corporation  would  pay  in 
taxes  only  about  3>^%  of  its  net  earnings,  whereas  the  New  York 
corporation  under  the  proposed  conditions  would  pay  in  taxes  about 
26%  of  its  net  earnings. 


21 


More  than  this,  the  Pennsylvania  corporation  could  actually  place 
its  manufacturing  products  in  direct  competition  with  those  of  the  New 
York  manufacturing  corporatioii.  Under  the  decisions  of  our  courts 
the  Pennsylvania  corporation  could  do  the  following  things  in  this 
State  without  being  amenable  to  our  tax  laws  and  therefore  paying  no 
taxes  in  the  State  of  New  York : 

(a)  It  could  transmit  to  its  agent  here  its  manufactured  product 
for  sale,  provided  the  proceeds  were  transmitted  forthwith  to  the  h<Mne 
office  in  the  State  of  Pennsylvania.  (See  People  ex  rel.  The  Parker 
Mills  V.  Com'rs  of  Taxes,  23  N.  Y.  242.) 

(b)  It  could  maintain  a  salesroom  in  a  city  in  this  State  where 
it  could  keep  on  hand  its  manufactured  products  for  sale  in  this  State 
and  could  keep  on  hand  sufficient  funds  to  pay  office  expenses,  pro- 
vided the  proceeds  of  the  sales  were  not  invested  here,  but  were  trans- 
mitted to  its  home  office  in  Pennsylvania.  (See  People  ex  rel.  Sherwin- 
Williams  Co.  V.  Barker,  5  App.  Div.  246,  affirmed  149  N.  Y.  623; 
People  ex  rel.  Tower  Co.  v.  Wells,  98  App.  Div.  82,  affirmed  182  N. 
Y.  5530 

(c)  It  could  maintain  an  office  here  for  holding  directors'  meet- 
ings and  paying  dividends,  maintaining  a  sufficient  bank  account  in 
this  State  to  pay  its  dividends.  (See  People  cx  rel.  Dives  Pelican  Co. 
v.  Feitner,  77  App.  Div.  190.) 

(d)  It  could  maintain  an  office  here  for  the  purpose  of  the  gen- 
eral solicitation  for  its  goods,  and  for  the  delivery  of  its  goods  to  cus- 
tomers here  where  such  orders  were  subject  to  approval  outside  the 
State.  (See  People  ex  rel.  Goetz  Mfg.  Co.  v.  Wells,  42  Misc.  86, 
affirmed  93  App.  Div.  613.) 

Now,  if  domestic  manufacturing  corporations  are  to  be  taxed  in 
this  State  in  the  manner  prescribed  by  Sections  12  and  182  of  the  tax 
law,  how  are  the  products  of  such  corporations  to  compete  under  such 
conditions  with  the  products  of  individuals,  co-partnerships  and  for- 
eign corporations  transacting  the  same  kind  of  business?  Would  not 
this  policy  necessarily  drive  manufacturing  capital  out  of  the  State 
of  New  York?  Would  not  manufacturing  capital,  if  this  policy  were 
folk)wed,  hereafter  be  invested  in  States  like  Pennsylvania,  rather 
than  New  York?  Therefore,  would  not  this  policy  if  consistently 
followed  eventually  result  in  decreased  rather  than  increased  revenue 
for  the  State  ? 


22 


PROPOSED  REMEDY 

It  is  perhaps  difficult  to  propose  a  fundamental  change  in  the  tax 
law  of  a  State  that  will  meet  the  general  approbation  of  all  persons 
interested  in  tax  reform.  It  has  been  generally  conceded,  however,  by 
those  who  believe  in  the  taxation  of  personal  property,  that  it  should 
be  taxed  at  a  lower  rate  than  the  general  rate  now  imposed  upon  real 
estate.  This  matter  was  very  clearly  and  concisely  set  forth  in  r^rd 
to  the  taxation  of  tangible  personal  property  by  Professor  Charles  J. 
Bullock  in  his  paper  entitled  'The  State  Income  Tax  and  the  Classi- 
fied Property  Tax,"  read  at  the  Tenth  Annual  Conference  of  the  Na- 
tional Tax  Association.   Professor  Bullock  said: 

"Tangible  personal  property  continues  in  all  the  States, 
except  Minnesota,  to  be  taxed  like  real  estate.  Yet  it  would 
seem  that  in  a  proper  scheme  of  classification  this  kind  of 
property  should  be  segregated  and  taxed*  at  a  special  rate.  It 
consists,  for  the  most  part,  of  merchandise,  machinery,  and  live 
stock,  property  which  may  be  assumed  to  be  employed  in  trade 
and  to  yield  an  ordinary  trade  profit  which  may  be  taken  to  be 
about  ten  per  cent.  From  property  of  this  description,  which 
is  mobile  and  subject  to  severe  interstate  and  even  international 
competition,  it  is  doubtful  if  any  of  our  States  ever  has  col- 
lect^, or  can  expect  to  collect,  taxes  that  absorb  more  than 
ten  per  cent  of  the  income.  Since  $100  of  such  property  may 
be  assumed  to  yield  an  average  income  of  about  $10,  the  proper 
tax  rate  would  be  80  cents  or  $1.00  per  $100;  but  the  rates  pre- 
vailing in  our  States  are  usually  double  these  figures.  The 

•  result  is  general  undervaluation,  by  which  tangible  personalty  as 
a  class  is  assessed  at  from  30  to  60  per  cent  of  its  true  value, 
while  in  individual  cases  assessments  range  from  nothing  up 
to  100  per  cent,  producing  the  grossest  inequalities  between  tax- 
payers. The  introduction  of  better  methods  of  taxing  intangi- 
ble property  has  indeed  simplified  and'  improved  somewhat  the 
taxation  of  tangible  personalty,  the  efforts  of  efficient  State 
tax  commissions  have  changed  things  for  the  better,  but  the 

.  problem  has  not  been  solved. 

•  "For  manufacturing  and  commercial  States  the  question  is 
one  of  the  greatest  importance.  In  these  commonwealths  public 
expenditures  are  usually  heavy  and  tax  rates  are  high.  Strict 
enforcement  of  a  tax  amounting  to  $1.50  to  $2.50  per  $iOD 
would  not  be  long  tolerated  by  public  opinion,  since  it  would 
drive  so  much  business  to  other  States.  The  rational,  expedient, 
and  straightforward  thing  to  do  is  to  reduce  the  tax  to  a  figure 
that  can  be  collected,  and  then  enforce  the  law  in  all  cases  with- 
out fear  or  favor.  When  expenditures  are  small  and  the  general 
tax  rate  does  not  equal  or  exceed  $1.00  per  $100,  the  matter  may 


not  be  of  great  importance ;  ^ut  elsewhere  the  proper  classifica- 
tion of  tangible  personal  property  is  becoming  increasingly  de- 
sirable and  necessary. 

In  principle  it  would  appear  that  it  is  not  important  what  logical 
method  were  pursued  in  classifying  personal  property  and  requiring 
it  to  pay  a  reascMiable  proportion  of  the  tax  burden.  The  method  pur- 
sued would  seem  to  depend  largely  upon  the  experience  and  Sentiment 
of  the  State  where  the  reform  Igislation  wa&  to  be  attempted.  Pro- 
fessor Bullock  in  the  paper  above  mentioned  stated  this  view  in  the 
following  language : 

"In  any  State  one's  choice  should  be  guided  largely  by 
public  opinion.  If  the  Rhad-e  Island  Commission  of  igii  had 
recommended  a  State  income  tax,  instead  of  a  flat  tax  on  in- 
tangibles, its  report  would  have  fallen  upon  deaf  ears.  If  re- 
cently a  flat  tax  had  been  proposed  in  Massachusetts,  instead 
•  of  a  State  income  tax,  nothing  would  have  come  of  it.  Since 
the  only  thing  that  matters  is  to  ^et  a  proper  classification  of 
the  objects  of  taxation,  names  are  of  no  account  and  we  ought 
to  follow  the  line  of  least  r^sistauce."  .  , 

Perhaps  the  people  of  ^e  State  of  New  York  are  in  a  better 
position  to  suggest  a  remedy  than  the  people  of  the  average  State  who 
have  to  meet  this  problem,  because  we  have  recently  had  a  full  investi- 
gation in  this  State  by  a  Joint  Legislative  Committee.  This  Committee 
filed  its  report  February  14,  1916.  We  quote  from  the  conclusion  on 
page  206  of  the  Report  of  this  Committee  as  follows :  '  :  ^ 

^     "The  legislature  submitted  to  this  Coiimiitt^^ 
tion  :  *Hpw  can  the  State  most  equitably  and  effectually  reach 
.    -  all  property  which  should  be  subjected  to  taxation  and  svoid 
conflict  and  duplication  of  taxation  on  iiie  sanje  property  ?' 

"Without  passing  upon  the  broad  questions  of  public,  policy 
mvolved  in  the  adoption  of  a  new  tax  system,  which  questions 
should  more  prc^erly  be  decided  by  the  Legislature  as  a  whole, 
this  Committee,  in  answer  to  the  specific  question  submitted  to 
it,  desires  to  state  that  all  the  evidence  presented-  and  all  our 
investigations,  the  results  of  which  are  presented  in  full  in  this 
.  report,  tend  to  show  that  the  end  sought  for  will,  be  accom- 
plished best  by:  (i)  the  ai5olition  of  the  present  tax  on  person! 
property;  (2)  the  withdrawal  of  general  business  corporations 
from  the  provisions  of  Section  182  of  the  tax  law;  and  (3)  the 
imposition  of  an  income  tax  on  individuals  and  general blisiness 
corporations,  including  manufacturing  corporations.", 

It  is  probable  tiiat  the  Committee  not  only  found  that  the  Income 
suggested  was  best  suited  to  meet  the  needs  of  the  situation  in  the 


24 


State  of  New  York,  but  that  it  was  a  reform  measure  operating  along 
the  lines  of  least  resistance,  as  suggested  by  Professor  Bullock  in  the 
paper  above  referred  to. 

It  is  probable  that  business  corporations  as  well  as  individuals 
of  this  State  would  seriously  object  to  the  filing  of  an  inquisitorial 
report  concerning  their  assets  and  property,  but  inasmuch  as  tlicy  are 
required,  whether  they  desire  to  do  so  or  not,  to  file  an  income  tax 
report  with  the  Federal  Government,  it  would  seem  that  they  could 
have  no  serious  objection  to  filing  a  duplicate  of  such  report  with  the 
State  authorities  for  the  purpose  of  an  income  tax  assessment  under 
a  State  income  tax  law.  This  position  is  strengthened  when  we  con- 
sider that  the  information  contained  in  the  Federal  report  of  these 
corporations  is  already  available  to  any  State  official  upon  application 
to  the  Federal  Government. 

It  would  therefore  seem  to  follow  under  present  conditions  in 
this  State  that  the  enactment  of  a  State  income  tax,  taxing  the  income 
of  business  corporations,  would  be  proceeding  along  the  lines  of  least 
resistance,  and  certainly  it  would  seem  that  this  or  any  Other  reason- 
aWe  taxation  scheme  which  eliminated  Sections  12  and  182  of  the 
present  tax  law,  and  at  the  same  time  provided  for  a  reasonable  tax 
upon  personal  property,  would  be  a  vast  improvement  over  present 
conditions. 

No  one  who  lias  given  the  matter  sufficient  attention  can  object 
to  the  theory  of  an  income  tax,  to  be  enacted  in  lieu  of  a  confiscatory 
tax  upon  personal  property.   It  is  contended,  however,  by  some  who 

opposed  to  net  inebme  taxatkm  fiiat  the  cost  of  collection  of  a  net 
incmne  tax  is  prohibitive.  In  other  w^ords,  they  contend  that  the 
amount  of  revenue  received  does  not  warrant  the  effort  and  expendi- 
ture upon  the  part  of  the  State,  made  necessary  for  the  purpose  of  col- 
lecting the  tax.  The  preliminary  report  of  the  Commissioner  of  In- 
ternal Revenue  dated  August  I,  1916,  shows  that  the  total  amount  of 
income-taxes  collected  by  the  Federal  Government  for  the  govem- 
tiierital  fiscal  year  ended  June  30,  1916,  was  $124,937,252.61.  The  total 
appropriation  for  the  income  tax  for  that  year  was  $1,501,360.00.  In 
other  words,  the  additional  expense  incurred  by  the  Commissioner  of 
Internal  Revenue  because  of  the  collection  of  the  income  tax,  in  addi- 
tion to  the  other  work  of  the  department,  was  $1,501,360.00.  By  com- 
paring this  appropriation  with  the  amount  of  income  taxes  collected 
it  will  be  seen  that  the  cost  of  collecting  the  income  t^  by  the  Federal 
Government  was  approximately  1.2%. 


25 


In  the  State  of  Wisconsin,  according  to  the  report  of  the  Tax 

Commission,  the  cost  of  collecting  the  income  tax  amounts  to  from 
about  1.11%  on  the  amount  assessed  to  2.77%  on  the  amount  collected. 
I  quote  from  the  report  of  the  Wisconsin  Tax  Commission  submitted 
December  3,  1914,  as  follows : 

"The  assessors  of  incomes,  it  will  be  remembered,  took  over 
the  duties  and  powers  of  the  old  county  supervisors  of  assess- 
ment, whose  salaries  and  expenses  had  been  borne  by  the  sev- 
eral counties  of  the  State.  They  perform  in  addition  to  their 
work  in  connection  with  the  income  tax  the  duties  performed  by 
the  old  county  supervisors  of  assessment,  and  do  the  work  very 
much  better.  The  cost  of  the  supervisors  of  assessment  in  the 
last  year  in  which  they  held  office  was  in  round  figures  $54,000. 
In  estimating  the  cost  of  the  income  tax,  therefore,  at  least  this 
amount  should  be  subtracted,  leaving  for  expenses  of  the  income 
tax  proper  $45,252.24  during  the  year  1912-1913,  and  $45,- 
197-59  ^or  the  year  1913-1914.  The  income  tax  assessed  Ae 
first  year  amounted  to  $3,482,145.66.  The  income  tax  assessed 
the  second  year  amounted  to  $4,084,497.40.  On  this  basis,  there- 
fore, the  income  tax  cost  to  assess  and  to  administer  the  first 
year  1.31  per  cent,  and  the  second  year  i.ii  per  cent.  On  the 
basis  of  the  actual  cash  collections,  the  income  tax  cost  the  first 
year  2.77  per  cent,  and  the  second  year  2.33  per  cent'' 

In  the  State  of  West  Virginia  the  State  Tax  Commission  advises, 
under  date  of  October  5th,  1916,  that  the  income  tax  in  that  State 
imposed  upon  corporations,  for  the  year  1915  will  yield  approximately 
$350,009,  with  an  approximate  cost  to  the  State  of  $7,500.00.  Upon 
this  basis  it  would  appear  that  the  cost  of  collecting  the  income  tax  in 
West  Virginia  is  approximately  2.1  per  cent. 

In  the  State  of  Connecticut,  where  there  is  an  income  tax  of  2 
per  cent  upon  a  proportion  of  the  net  income  of  business  corporations 
transacting  business  in  that  State,  the  cost  of  collection  has  been  re- 
duced to  a  minimum.  This  is  due  to  the  fact  that  under  the  Connecti- 
cut law  the  State  accepts  as  a  basis  of  taxation  any  report  that  is 
acceptable  to  the  Federal  Government,  and  basis  its  tax  upon  the  con- 
clusions reached  by  the  Federal  Government  in  imposing  the  Federal 
Income  Tax.  This  gives  the  State  tax  department  the  benefit  of  all 
the  expensive  machinery  of  the  Federal  Government  in  ascertaining 
the  proper  amount  of  net  income  taxable  to  any  corporation,  and  the 
State  tax  department  only  has  to  determine  by  arbitrary  rule  what  pro- 
portion of  the  total  net  income  is  taxable  in  the  State  of  Connecticut. 
In  a  communication  dated  September  29th,  1916,  from  the  State  Tax 


26 


Commissioner  of  Connecticut  I  am  advised  that  the  receipts  under 
the  law  for  the  first  year  will  amotmt  to  approximately  $1,600,000; 
that  there  has  been  comparatively  little  difficulty  in  the  administration 
of  the  law,  and  that  there  has  been  practically  no  additional  cost  for 
collecting  the  tax,  as  the  State  tax  department,  as  constituted  prior  to 
the  enactment  of  the  law,  was  able  to  take  on  the  extra  duty  of  col- 
lecting the  income  tax  with  comparatively  httle  or  no  additional  ex- 
pense to  the  State. 

Based  upon  information  received  from  taxation  officials  who  have 
successfully  administered  recently  enacted  income  tax  laws,  it  would 
appear  that  the  opinion  of  those  individuals  who  contend  that  the  cost 
of  collecting  an  income  tax  is  prohibitive,  is  without  foundation  of 
fact,  and  contrary  to  the  experience  of  such  taxation  officials. 

CONCLUSION 

In  conclusion  it  is  respectfully  submitted  that  it  would  be  no  de- 
parture from  sound  economic  theory  if  after  the  experience  of  the 
Federal  Government  and  the  States  above  referred  to,  the  State  of 
New  Yoric  should  undertake  to  impose  a  practical  net  income  tax  upon 
business  corporations.  And,  it  is  further  submitted  that  the  writer 
knows  of  no  better  theory  of  taxing  such  companies  in  this  State 
that  has  been  suggested  or  recommended  up  to  the  present  time,  as  a 
result  of  sufficient  investigation  and  knowledge  of  the  whole  subject 


27 


COLUMBIA  UNIVERSITY  UBRARIES 


This  book  is  due  on  the  date  indicated  below,  or  at  the 
expiration  of  a  definite  period  after  the  date  of  borrowing,  as 
provided  by  the  rules  of  the  Library  or  by  special  arrange- 
ment with  the  Librarian  in  charge. 


\  DATS  WMmOWIO 

DATS  DUB  1 

DATE  •ORROWKD 

OATK  DUK  1 

i 

"  —  1 

1 

.... 

1  

<  1 

•t 
I 
! 

I  — ,  - 

1^. 

^1934 


•   Fjl  . 

Tazatioii  of  business 
tioii«« 


corpora* 


OC^  1 3  1943 


END  OF 
TITLE 


